With all the breaking news from Washington, you may have missed the passage of a new U.S. law that could affect your retirement planning. On Dec. 21, President Donald Trump signed the Setting Every Community Up For Retirement Enhancement (SECURE) Act after bipartisan approval by Congress.
Per Morgan Stanley, the new legislation will have the most immediate impact on Americans in their 60s who are nearing retirement. But it could eventually open the door to new retirement account options for millions of Americans who now work for small and midsize businesses. (Morgan Stanley and its financial advisors do not provide tax or legal advice, so it’s important to talk with your tax and legal advisors so you can make well-informed decisions in the changing financial landscape.)
If you have been putting money aside every year in an employer-sponsored 401(k) or 403(b) defined contribution plan, an individual retirement account (IRA) or a self-employed retirement account (SEP-IRA), the new law gives you a longer holding period before you need to start withdrawing and paying taxes on those funds.
Previously, individuals with those types of qualified retirement accounts had to start making withdrawals at age 70½ — a time when many people are still working. But if you are below that age — as of Dec. 31, 2019, you no longer have to take those required minimum distributions until age 72, under most circumstances. This change applies to distributions required after Dec. 31, 2019, with respect to individuals who attain age 70½ after such date. This change does not apply to IRA owners and participants who reached age 70½ in 2019 or earlier.
That change gives your retirement plan contributions another year or more to grow tax-deferred before you need to begin withdrawals. If you are fully or partially retired at that point, your income is likely be lower than during your prime working years, reducing your potential tax liability on those distributions.
For taxable year 2020 and beyond, the Act allows anyone that is working and has earned income to contribute to a traditional IRA regardless of age. You are able to keep contributing to your IRA after age 70½ for as long as you are still working and have sufficient earned income, you could contribute up to $7,000 a year in 2020 (or $14,000 if you are married), reducing your immediate income tax liability.
The new law also revises the rules regarding the beneficiaries of 401(k) and other qualified retirement plans. Previously, the beneficiary could stretch out the required minimum distribution amounts over his or her expected lifetime. Now, the law requires the funds to be distributed within 10 years of the death of the account holder under most circumstances. Minor children and surviving spouses are typically exempted from this rule.
However, the change could be significant if you have designated an older child or grandchild as the beneficiary of your retirement account. Let’s say you die tomorrow with $1 million in your account, naming your 45-year-old daughter as beneficiary. She would have to withdraw $100,000 a year (plus accrued interest and dividends) for the next 10 years, a significant potential addition to her income tax burden.
Looking further ahead, the SECURE act also makes it easier for small employers to offer retirement plans for their employees by joining together in a multiple employer plan or MEP. Those provisions don’t take effect until 2021, and it may take even longer to put the regulatory framework into place.
In any case, the start of a New Year is an ideal time to review your financial situation, and consider increasing your contributions to a tax-deferred retirement account. The dollars you save today can be the building blocks for a better financial future.
Andrew Menachem, CIMA®, is a wealth adviser at The Menachem Group at Morgan Stanley in Aventura. Views expressed are those of the author, not necessarily Morgan Stanley, and are not a solicitation to buy or sell any security. The strategies and/or investments referenced may not be suitable for all investors. Follow Menachem on Twitter @AMenachemMS.